Territorial Dispute Continues to Affect Japanese Car Sales in China

By Colum Murphy

Protesters overturned a Japanese-brand police car during an anti-Japanprotest in Shenzhen, China, last year. Resistance in parts of China persists.

Reuters

XIAN, China—One year ago an angry anti-Japanese mob beat local resident and Toyota Corolla driver Li Jianli and left him lying on the street. The incident shocked China—and led many to avoid Japanese cars.

Today Mr. Li, who is in his early 50s, is still suffering from his injuries, according to his wife—and Japan’s biggest auto makers are still struggling to regain the footing they lost in places like this dusty western Chinese city of around eight million.

Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. have mostly bounced back from the territorial dispute between Beijing and Tokyo. Among other enticements, they offered programs that would pay for damage to cars in anti-Japanese violence.

But analysts and industry executives say the auto makers lost ground in the interior and western part of the country, where the battle for China’s drivers has shifted as the coastal regions have matured. Rivals such as Volkswagen AG, General Motors Co. and Ford Motor Co. have been faster to offer lower-cost models that appeal to Chinese drivers with smaller wallets but big desires for quality.

“That is where the auto industry’s future lies,” said Mei Songlin, vice president and managing director with advisory firm J.D. Power China. Referring to China’s interior cities, he added, “if they can’t be strong in tier three and four [cities] then that is a hurdle for growth.”

Neither the Japanese auto makers nor official statistics reveal sales by city or region. But interviews with car buyers and car dealers suggest Japanese brands remain a tough sell in Xian—home of the famous terra-cotta warriors and a gateway to China’s west.

A manager at a Nissan dealership in Xian said sales in the first seven months of this year were down about 20% compared with the same period last year. In the first half of 2013 Nissan launched two models—a new Teana sedan and new Livina compact. But staff at the dealership said Teana sales were “so-so.”

A spokeswoman for Nissan declined to comment about results in Xian, though she cited national statistics that show it sold 682,500 cars in the first seven months of this year, down 7.1% from the same period last year. The company launched a special marketing campaign that included setting up new dealers, and stepped up advertising and promotion activities aimed at boosting sales in 118 emerging cities throughout China. Such activities yielded sales of more than 280,000 vehicles, the spokeswoman said. This year Nissan expanded the number of cities covered under the campaign to 135.

A Toyota dealer also in Xian said business had slowed. “It used to be that demand exceeded supply for Toyotas,” the manager said. “Now it is the reverse.”

A spokesman for Toyota in China said the company had no comment on the dealer’s remarks but said Toyota was ramping up its focus in China’s interior albeit from its currents low base in terms of sales. The launch of compact cars Vios and Yaris had consumers from inland cities very much in mind, he said.

Toyota expects sales of 900,000 vehicles, up around 7% on last year.

A Honda spokeswoman said characterizing sales momentum in the interior is difficult because it differs depending on city and model. “But it is true that markets in interior cities are growing more rapidly and we are strengthening our sales network there,” she said.

The territorial dispute between China and Japan centers on a group of uninhabited islands in the sea between them. Tensions reached a boiling point last year when the city of Tokyo said it would purchase the islands from their private Japanese owners.

On Sept. 15, 2012, Mr. Li was driving in central Xian when a crowd surrounded his white Corolla. When he got out he was beaten severely, including by an assailant who attacked him with a bicycle lock.

Mr. Li can no longer move the right part of his body, according to his wife, who says her husband could walk short distances by himself with the help of others but has seen his health deteriorate in recent months.

Images of the attack spread through China’s Internet, scaring off potential buyers even as general anti-Japan sentiment drove off others.

By October, Japanese auto makers’ share of new car sales in China plunged to 9.1% from 20.9% in August 2012, according to data from auto research firm WAYS.

Japanese car makers rushed to reassure buyers. Nissan pledged to cover the cost from vehicle repairs and pay up to 200,000 yuan (around $32,500) to any customer who was injured as a result of a the violence. A spokeswoman for Nissan said she could not comment on how many consumers took up such offers.

Ren Yong, vice managing director of Nissan’s passenger car joint venture in China, said the company also launched a series of countermeasures aimed at dealers in the wake of the anti-Japanese protests—including giving cash compensation to staff at dealerships damaged by mobs. The company declined to reveal details of the amounts.

Honda also offered a program to ease consumers’ minds. Toyota didn’t have an official campaign but dealt with claims on a case-by-case basis. Honda declined to reveal the number of customers that applied for the coverage. A spokesman for Toyota said there had been “not that many” claims.

By July, Japanese companies had recovered to 18.8% of market share. Tian Faling, a 34-year-old Xian resident, recently settled on a Toyota Reiz after considering several comparable models, including from Volkswagen. “I like the cost performance of Japanese cars,” he said while sitting in a Toyota dealership in Xian. “I want to focus on the car itself, not other things,” he said.

Japanese auto makers are moving to expand their lineup of products for China. Nissan plans 17 new models in China between 2011 and 2016.

Honda plans to introduce 12 new models in China by the end of 2015, with five developed specifically for the China market. Its China-developed Crider sedan went on sale in June month and retails from 114,800 yuan, or about $18,600. By July, sales had reached around 10,000 cars, boosted in part by advertising that centered on Portuguese football star Cristiano Ronaldo.

“In the past, people said Honda was not looking to China,” a spokeswoman said. “But no one can say that anymore.”